January 17, 1996
The Ninth District economy continues to move forward, but activity in some sectors is feeling a chill. Several factors remain positive. Continued tightness in labor markets indicates that many firms are not experiencing any slackening in activity. Farm income and spending show improvement, and petroleum exploration and metal mining are strong. Winter tourism businesses are reaping the benefits of favorable weather for snowmobiling and skiing. There are few indications of price pressures.
But while the economy continues to grow, the rate of growth apparently is slowing due to weakness in a number of areas. Builders' order books are getting thinner. Consumer spending on vehicles and general merchandise is subdued. Manufacturers describe diminishing orders for a variety of goods. Output of paper and other forest products is slowing in response to lower demand.
Construction
"Builders have some work, but there is no backlog any more," is how
one Minnesota lumber dealer characterizes the construction sector.
While it is difficult to quantify trends in the trough of the winter
slowdown, the consensus across much of the Minneapolis district is
that the 1996 construction season will be somewhat slower than in
the preceding three years. However some areas, particularly Fargo,
N. D., and western Montana, report brisk construction activity.
Natural resource industries Natural resource industries are generally robust, with the exception of the forest products sector. Oil and gas exploration continue to boom. The drilling rig count of 19 in North Dakota in early January is double that of a year ago and over three times that of early 1994. Output at iron, copper and gold mines shows only seasonal slowing.
But forest product production is slowing. "A number of paper mills are scheduling some selected downtime," says the head of one Minnesota logging firm. Paper prices are dropping for the first time in two years and many mills are slowing production. Reduced demand reportedly is slowing output in other forest product areas. Lumber output has slowed, but oriented-strand board producers generally continue to produce at capacity. They face lower prices which industry sources attribute to a combination of new capacity in other regions of the country and to somewhat reduced building activity compared to a year earlier.
Agriculture
As farmers plan for the 1996 season, there is general optimism about
crops, but the outlook for livestock remains somber. Bankers
responding to a Minneapolis Fed survey of agricultural credit
conditions for the final quarter of 1995 generally described farm
income and spending as up from earlier in that year, but still
somewhat below normal levels. A majority expected higher crop prices
to prevail into 1996, and many expected continued improvement in
farm spending in early 1996. However, bankers in areas where cattle
production is important stress the continuing financial pressures on
their customers, and expect little improvement in the new year.
Manufacturing
Other developments in agriculture include 10 to 40 basis point
declines in farm interest rates from the preceding quarter. Land
prices are generally up 2 percent to 4 percent over year-earlier
levels. Many sources cite continuing uncertainty about federal
agricultural programs as a disincentive to longer-term planning and
investment by farmers. In midwinter, soil moisture levels are
favorable and the winter has not been unduly hard on livestock.
"We are sort of treading water, and we don't see it getting better very soon," says a business analyst at an electronic device manufacturer in Minnesota. The outlook is even less positive for a maker of components for trucks and heavy equipment: "Our new orders are just falling off a cliff," says the company's CEO. The bloom is definitely off the rose for many manufacturers; earnings of publicly traded corporations are slowing and industrial electrical use in Minnesota and South Dakota is falling below five-year trends in several categories. Nonelectrical machinery production seems particularly slow.
Consumer spending
"In a word, it's been difficult," says a representative of one
Minneapolis-based retailer in describing a lackluster holiday sales
season. Several other large retail chains echo that view, and the
consensus for the Minneapolis-St. Paul area is holiday season sales
of general merchandise sales were below retailers' plans and only
modestly above 1994 levels. But news from some smaller cities across
the district is more positive. Sioux Falls, S. D., Marquette, Mich.,
and Billings, Mont., all report strong holiday sales. There also
seems to be variation by product category. Apparel is described as
particularly slow and toy sales somewhat below expectations, while
stores selling home computers and electronic items fared somewhat
better. Some reports indicate that smaller specialty stores did
somewhat better than mass merchandisers, as consumers spent less but
more selectively.
Auto sales show little change from late fall, generally slow with some regional variation. Sport utility vehicles and pickup trucks show the most strength; conventional sedan sales are the weakest.
Tourism
Snowmobilers and skiers have been out in force as early snow boosted
tourism in the eastern part of the district. Business at tourism
establishments is up 5 percent to 6 percent in the Upper Peninsula
of Michigan for the last quarter of 1995 compared to a year earlier,
according to one official. A northern Wisconsin town saw a 50
percent increase in tourism activity in December compared to 1994
when snow was sparse. Business at a ski resort in northern Minnesota
is up 10 percent to 15 percent for the season. An executive of a ski
resort in Montana reports a slightly softer market due in part to
the Canadian exchange rate. "People are tightening a little," she
says. Montana businesses adjacent to Glacier and Yellowstone
national parks complain that the federal government shutdown of most
park activities is hurting their winter business.
Employment, wages and prices
"It is still hard to get good workers," reports a North Dakota plant
manager expressing a common sentiment in the district. Unemployment
rates remain well below national averages, and many businesses
employing skilled technicians or entry-level workers find it
particularly difficult to fill all positions. Few employers report
large across-the-board wage increases but some are extending
benefits to previously uncovered workers.
News of price decreases outnumbers that of increases. Reductions in paper and packaging prices are reported for the first time in 18 months. Ferrous and nonferrous metals are also reportedly down from a year ago and there are no problems in deliveries. Grain prices remain high, and soybean prices have increased since harvest, but continuing low livestock prices have kept food price increases low. Gasoline and other motor fuels continue about 5 cents per gallon below year-earlier levels.